Home Equity Scheme For Pensioners

Sydney Morning Herald

Wednesday December 8, 1993

By JOCELYN EASTWAY

WE OFTEN hear of pensioners being asset-rich and income-poor but we rarely hear of a popular solution to the problem.

Judged by the flood of phone calls to Advance Bank's hotline over the past week, pensioners seem to like the idea of the Federal Government's new Home Equity Conversion Loan Scheme - otherwise known as HEC.

The HEC scheme was announced in the 1992-93 Budget and Advance Bank was chosen by the Department of Social Security to provide the new loans from last Wednesday.

The idea of an HEC loan is to let pensioner home owners borrow money against the value of their homes, giving them extra cash to boost their standard of living.

The latest figures from the Australian Bureau of Statistics show that more than 70 per cent of age pensioners own their own home.

An HEC loan will be limited to $5,000 for pensioners aged between 60 and 75 and $7,500 for older pensioners.

The variable interest rate on the loan will be the same as the bank's standard home loan rate, at present 8.75 per cent. Pensioners will pay a low$30 application fee, thanks to a government subsidy.

The Federal Government also will subsidise the cost of independent advice(up to $150) from a solicitor, accountant or financial planner. Pensioners will not be able to sign up for an HEC loan unless they have received some professional advice.

But an HEC loan is not like other home equity loans. Instead of making fortnightly or monthly repayments to cover the interest bill, the interest on the HEC loan is simply added to the loan balance. This means you end up paying interest on your interest.

Avoiding repayments may sound good in the short term. But when it comes to paying back the loan, you may be horrified to see how the compounding of interest has made your loan blow out.

Calculations by Advance Bank show a $5,000 loan at 9.5 per cent a year would grow to $12,880 in 10 years and to $33,180 in 20 years.

The loan does not need to be repaid either until the property is sold, you leave your home for more than a year, or the last surviving borrower dies. If you were hoping to pass on a debt-free home to the next generation, an HEC loan is probably not for you.

It is possible to pay off some or all of the loan along the way if you or your family come into extra cash.

An individual payment cannot be less than $500. A big worry for many pensioners is the risk of being asked to leave their homes if the loan amount grows bigger than the value of the property. Advance Bank makes it quite clear this cannot happen.

In fact, Advance guarantees all HEC loan borrowers will get a minimum of$20,000 (indexed to the CPI) when they sell their house, no matter how big the loan has grown.

So if your house is sold for less than the value of the loan, the bank makes a loss. No-one is expected to pay back the bank for the $20,000 equity guarantee or the bank's loss.

© 1993 Sydney Morning Herald

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